In the fourth of a series of conversations, just-auto editor Dave Leggett and GlobalData lead automotive analyst Calum MacRae discuss some of the big questions prompted by the coronavirus crisis and its potentially lasting impact on the automotive sector.
Dave Leggett: Well, that was quite a week. Who would have thought we'd be looking at vehicle markets down by 50-to 90% and thinking – well, that wasn't too bad? But it's all relative, I guess, with some markets unexpectedly strong – even at these well below normal levels. Many in the industry will be relieved that there are signs of life at least, even as the public health crisis persists and the industry stays very, very far from normal.
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Calum MacRae: Yes, extraordinary times when we see the kind of market falls we saw in Italy, Spain and France for May and think that it could have been a lot worse. I think what we've seen in May confirms that April was the nadir for many markets, except for China (already past the worst) and Brazil (where we might still be awaiting the worst). Now it's a question of seeing how quickly or slowly the markets return to some sense of normality. The automakers will be expressing relief that now there seems to be some consensus from governments that the worst of the public health issues are past and now it's time to turn to supporting the auto sector and other major components of the economy.
DL: Yes, that familiar theme of seeking government support in extraordinary times is definitely back. I wonder if we'll finally see a significant market shift towards EVs, helped by government stimulus policies. There's a feeling generally I think that a situation like we have now, with such an unprecedented crisis, allows for a little bit of a reset, clean break even, with what went before. It was interesting to see how Berlin rebuffed the auto industry a bit and skewed incentives towards EVs. I wonder if that might be one consequences of this crisis – that it gives EVs a lift in Europe. I guess a lot will still depend on how serious this economic crisis ultimately proves, as well as new price points for vehicles after incentives and so on.
There's also more talk of more subscription services coming in, possibly an opportunity for more disruptors. So you 'own' a vehicle, not quite a pure asset share, but you have it for a defined period – what we used to call personal contract hire perhaps!
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CM: I think what we've seen so far is definitely designed to boost EVs – it'll be the Corona dividend of at least greening the economy in one way or another. It doesn't help OEMs cover their fixed costs too much though, unless there's a mad dash for EVs as second cars. One consequence could be a supply chain squeeze again as there's not that much capacity – batteries, e-motors etc – built up to support EVs in the short-term. Italy seems like it's going to adopt a more broad-brush approach to incentives – got to help FCA as much as possible as it's not exactly at the forefront of EV development.
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By GlobalDataWhat we have seen so far is that EVs are taking a much greater share of the market in the first half of 2020 than they might have done otherwise and that looks like a pattern that will be set for the rest of the year.
As for subscriptions, I think the jury is out on them. I know there's been a major surge in interest in Australia (check out Carbar by the way, tremendous name for a subscription service), but all the schemes I've seen so far seem so heavily weighted towards protecting the OEMs in what you might want access to each week or month that the prices are way beyond what you'd think the sweet spot in the market is. At the £1000 a month level there's a lot of excess utility built into such a premium.
DL: Yeah, I agree. Making the numbers work won't be easy – at least in terms of the kinds of new potential customers being looked at, people who might be more averse to public transport in the future, for example. Actually, now's a very good time to pick up a used car and that might look like a better bet for those who are new to the game or looking for an additional household car.
There is a lot of talk about people who generally use public transport being less inclined to use it for daily commutes in the future. It's certainly an interesting notion, but I suspect the reality is that we'll be back to problems of managing road congestion and air quality in cities, just as pre-crisis. It would be nice to think that maybe people will walk or cycle a bit more after this though.
It's all about the modal balance that best serves the whole community and the economy (and yes, environmental and sustainability concerns), with appropriate carrots and sticks. I don't envy the transport policymakers and planners, but they do have an opportunity now – in cities – to be bold, a little bit more creative than pre-crisis, reset some things. And the private car can play its role of course – if anything, a much more appreciated household asset after this.
Car companies, of course, still have to anticipate the long-term megatrends in future mobility and where the car fits in. Not easy, especially as they focus on core and cash in the here and now.
CM: The used car element you mention is interesting at this point in the cycle. There is plenty of evidence coming out of the US that used car prices are rising as demand picks up due to people wanting to avoid public transport and eschew shared mobility. There'll come a tipping point there when the cost of a used car over 3-4 years will look not that much different to some of the deals for new vehicles we can expect to see later in the year. Heavy incentivisation in the US market seems past its peak now as inventory becomes depleted but they have got to move the metal so heavy incentives will be back in the second half as production rates gradually increase.
DL: The post-Covid role of the car and private motoring is starting to look a little different to pre-Covid isn't it? Attitudes could be changed, though it's hard to know what will be permanently altered.
CM: At least future mobility looks like it has a central role for the car again. That wasn't so certain pre-Covid when futurologists were looking at the 'smart cities' of the future. And I'm willing to bet it's not just the car companies breathing a sigh of relief, it will be insurance companies too. With the prospect of robotaxis everywhere, autonomous this and that, the future of the auto insurance business was looking very sketchy to say the least. In that vein did you see the report just out saying that autonomous vehicles won't completely compensate for the human error component of road traffic accidents – 90% of the cause of RTAs -so you have to ask if they'll ever become reality beyond Level 3+ of autonomy
DL: It is going to be interesting as we come out of this crisis to see what gets a 'reset' and how the industry adapts to what might be changed attitudes from consumers. For example, will people care more about air quality inside the car and how air is filtered? There just may be a greater sensitivity to hygiene and overall comfort inside the cabin.
And, to pick up your point about technological limitations for robotaxis, will attitudes to ADAS change, people more interested in being engaged in the driving experience, a sense of personal resilience becoming prevalent perhaps. Did you see that recent Tesla on autopilot crash into a freight truck overturned across a highway in Taiwan? A reminder perhaps that trust in human technological advances has its limits. Indeed, the coronavirus perhaps serves as a reminder of human fallibility on many levels.
CM: Concern for air quality could be a new role for NCAP. Just add another letter and you've got the New Car Air Assessment Program (NCAAP). Seriously, there could be a role for trustmarks in the future around air quality of new vehicles, public transportation etc. It'd be one way to assuage some people's fears of getting out and about again.
As to ADAS, it depends who's driving and their mood at the time. With R&D budgets pressured and remote working it could be that we see far less in the way of ADAS innovation in the future. Some of the features one just tends to play with for the first few journeys and they're never deployed again so you do have to question whether the development dollars have always been spent wisely.
In essence, so much is unknown and in play or up for grabs at the moment – but we don't know what the playing field looks like.
DL: I agree. That's what companies in all sectors have to grapple with – how will the post-Covid world look and how can we plan for it? The motorised vehicle is at the heart of economic activity and how society operates. In essence that won't change, but changes at the margin can wreak big changes on industries. Hertz, for example, has filed for Chapter 11 in the US – which begs the question of how that small part of the transport sector will look, post-Covid. How will car hire shape up if international travel doesn't fully recover because people decide foreign holidays that come with new restrictions and regulations aren't such an attractive proposition any longer? Airports weren't exactly fun pre-Covid were they? My point is that transportation demand could be impacted in lots of different ways and that will eventually feed, one way or another, into orders for new vehicles. This crisis will probably come to be seen as something of a watershed in lots of ways. Problem is, we don't know how the next chapter plays out and companies have to work on best assumptions, scenario planning.
I also think much will depend on how much the collective human psyche is changed. Our assumptions about the world and how it works – in general – have been seriously undermined. That might just mean, in simple terms, that everyone is a bit – or a lot – more cautious in many aspects of their lives. Owning a car might be seen as a good bet for resurgent values of self-reliance and independence, but what cars will hit the new sweet spots?
CM: I'd bet on it being a market for SUVs. Boring I know, but if you're going to own one car there's going to have to be some redundant utility built into it to meet all demands. Eponymously, SUVs meet that remit. Even for multi-car households SUVs hit the mark. I guess people will want to do a lot more 'cocooning' in the future – SUVs already meet that remit too. So more SUVs. Even amid all this tumultuous change, nothing is going to change to alter the path of the SUV.
DL: I think you may be right about SUVs and that's a good point about cocooning. People feel more protected in SUVs and crossovers, so they could thrive, especially the small ones. And if it's about that feeling of being protected in a mainly urban setting day-to-day (but with the capability to venture to the countryside), then I guess the small ones that are actually only 2WD could fit the bill – also being cheaper and lighter than 4WD.
(To be continued)
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